March 27, 2012
Jack Bogle has spent his career selling investors on virtues of index funds. In a talk last week, he spoke triumphantly, as if the battle is all but over.
In the first month of this year, he said, the top 50 mutual funds took in $15 billion of new investor funds, of which $17 billion came into Vanguard.
“Our top 50 rivals together had outflows of $2 billion,” he said. “Those trends are not passing fads.”
Bogle is the founder of the Vanguard Group, the largest provider of indexed mutual funds. He now serves as the president of Vanguard's Bogle Financial Markets Research Center. He spoke last week at the Index Universe conference in Philadelphia, where he was interviewed on stage by Ted Aronson, the founder of Aronson Johnson Ortiz, a Philadelphia-based active manager.
About 25% of mutual fund assets are invested in index funds, Bogle said. The number would be higher if closet indexers and quantitative-index strategies were included. In the last five-plus years, he said, index funds have gained $600 billion in assets, while active managers have lost $400 billion
“Those are big warning signs,” Bogle said.
Over his career, Bogle said, the investment industry has grown from a cottage industry to a marketing-driven behemoth. It now operates like a casino, and the croupiers – the active managers, whose fees are unjustified in light of the value they fail to add – have opened the door for indexing.
That said, Bogle advised investors to disregard the fact that index funds outperformed active managers by the largest amount ever last year. “It’s not going to happen again,” Bogle said. “It’s simply irrelevant.”
Former Supreme Court Justice Louis Brandeis correctly warned in 1914 that the widespread speculation of that era would lead to a collapse because of the “relentless rule of humble arithmetic.” Investors should recognize that indexing will triumph over the long term because of that same rule, Bogle said.
Bogle took a swipe at fundamental indexing, citing the methodologies of Rob Arnott and Jeremy Siegel. While their ideas are not “terrible,” Bogle said, they do not represent the Copernican revolution that some have contended.
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